EU implementation of the final Basel III framework

In December 2017, the Basel committee agreed on a new regulatory framework denoted the ‘Final Basel III Framework’ including, e.g. so-called capital floors defining a minimum level of capital for different types of portfolios. Our assessment is that the proposed solution is not consistent with three key principles that the G20 provided as guidance for implementation at a global level:

• Support better alignment of risk assessments: We find that the package will lead to a widening – not narrowing – of gaps between probable future losses and capital requirements. This is also evidenced by the fact that the capital requirements will increase the most for banks with the lowest historical losses.

• Should not lead to a significant increase in capital requirements: EBA’s main scenario will lead to an increase in minimum required capital across EU banks of 24%, and significantly higher for low-risk portfolios. This corresponds to a total core equity need of 300-400 bn, i.e. a very significant increase.

• Aim for a level playing field at global level: The increase of 24% in the EU should be seen against almost unchanged average capital requirements in the US.

In addition, the higher levels of required capital will increase the borrowing costs for European households and businesses of some 0.12-0.16 percentage points, corresponding to a price increase of 5-7%. We find this could lead to a permanent reduction in GDP of around 0.5%. In contrast, With the level of recapitalisation that EU banks have achieved since the crisis, any additional layer of capital adds only insignificant improvements to the financial stability.

The study is commissioned by the European Banking Federation and a group of European banking associations.